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MENTAL MODEL · M3497

Crowding Out Effect

Crowding Out Effect
BusinessHigh supportPublic Economics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

The phenomenon where an increase in government spending leads to a decrease in private investment, mainly through the interest rate mechanism: increased government borrowing raises interest rates, increasing the cost of financing for the private sector, thereby suppressing private investment and partially or fully offsetting the expansionary effect of fiscal policy.

SCAFFOLDING EFFECT

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Fiscal policy evaluation. Provides a theoretical framework for understanding the limitations of fiscal policy. In policy-making, it reminds policymakers to consider the potential impact of fiscal expenditure on the private sector, and to reduce the crowding-out effect by optimizing expenditure structure and improving the investment environment.

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The crowding-out effect refers to government expansionary spending (especially borrowing) raising interest rates, suppressing private investment, and partially offsetting the stimulus effect. It reveals the substitution between the public and private sectors in the credit market.

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Source support: Explicit

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    zh.wikipedia.orghttps://zh.wikipedia.org/wiki/%E6%8C%A4%E5%87%BA%E6%95%88%E5%BA%94ZH · Explicit
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